3 Supply Quantity supplied Law of supply Amount of a good Sellers are willing and able to sellLaw of supplyOther things equalWhen the price of the good risesQuantity supplied of a good rises
4 Supply Supply schedule - a table Supply curve - a graph Relationship betweenPrice of a goodQuantity suppliedSupply curve - a graphIndividual supplySupply of one seller
5 Ben’s supply schedule and supply curve 5Ben’s supply schedule and supply curve$3.002.502.001.501.000.50Price ofIce-CreamConesSupply curvePrice ofIce-cream coneQuantity ofCones supplied$0.000.501.001.502.002.503.000 cones123451. An increasein price . . .increases quantityof cones supplied.121011912345678Quantity of Ice-Cream ConesThe supply schedule is a table that shows the quantity supplied at each price. Thissupply curve, which graphs the supply schedule, illustrates how the quantity suppliedOf the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward.
6 Supply Market supply Market supply curve Sum of the supplies of all sellers for a good or serviceMarket supply curveSum - individual supply curves horizontallyTotal quantity supplied of a good variesAs the price of the good variesAll other factors that affect how much suppliers want to sell are hold constant
7 Market supply as the sum of individual supplies (supply schedule) 6Market supply as the sum of individual supplies (supply schedule)Price of ice-cream coneBenJerryMarket$0.000.501.001.502.002.503.0012345+68=71013The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones
8 Market supply as the sum of individual supplies 6Market supply as the sum of individual suppliesBen’ssupply+Jerry’ssupply=Marketsupply$3.002.502.001.501.000.50Price ofIceCreamCones$3.002.502.001.501.000.50Price ofIceCreamCones$3.002.502.001.501.000.50Price ofIceCreamConesSBenSMarketSJerry121011912345678Quantity of Ice-Cream Cones1234567Quantity ofIce-Cream Cones18246810121416Quantity of Ice-Cream Cones
9 Supply Shifts in supply Increase in supply Decrease in supply Any change that increases the quantity supplied at every priceSupply curve shifts rightDecrease in supplyAny change that decreases the quantity supplied at every priceSupply curve shifts left
10 Shifts in the supply curve 7Shifts in the supply curvePrice ofIce-CreamCones`Supplycurve, S3Supplycurve, S1Supplycurve, S2Decrease insupplyIncrease inSupplyQuantity of Ice-Cream ConesAny change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.
11 Supply Variables that can shift the supply curve Input Prices Supply – negatively related to prices of inputsTechnologyAdvance in technology – increase in supplyExpectations about futureAffect current supplyNumber of sellers – increaseMarket supply - increase
13 Supply and Demand Together Equilibrium - a situationMarket price has reached the level :Quantity supplied = quantity demandedEquilibrium price - the price:Balances quantity supplied and quantity demandedEquilibrium quantityQuantity supplied and the quantity demanded at the equilibrium price
14 The equilibrium of supply and demand 8The equilibrium of supply and demand$3.002.502.001.501.000.50Price ofIce-CreamConesSupplyDemandEquilibriumpriceEquilibriumEquilibriumquantity121011912345678Quantity of Ice-Cream ConesThe equilibrium is found where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded. Here the equilibrium price is $2.00: At this price, 7 ice-cream cones are supplied, and 7 ice-cream cones are demanded.
15 Supply and Demand Together SurplusQuantity supplied > quantity demandedExcess supplyDownward pressure on priceShortageQuantity demanded > quantity suppliedExcess demandUpward pressure on price
16 Supply and Demand Together Law of supply and demandThe price of any good adjustsBring the quantity supplied and the quantity demanded into balanceIn most marketsSurpluses and shortages are temporary
17 Supply and Demand Together Three steps to analyzing changes in equilibriumDecide: the event shifts the supply curve, the demand curve, or both curvesDecide: curve shifts to right or to leftUse supply-and-demand diagramCompare initial and new equilibriumHow the shift affects equilibrium price and quantity
18 Three steps for analyzing changes in equilibrium 3Three steps for analyzing changes in equilibriumDecide whether the event shifts the supply or demand curve (or perhaps both).Decide in which direction the curve shifts.Use the supply-and demand diagram to see how the shift changes the equilibrium price and quantity.
19 Supply and Demand Together Example: A change in market equilibrium due to a shift in demandOne summer - very hot weatherEffect on the market for ice cream?Hot weather - demand curve (tastes )Demand curve shifts to the rightHigher equilibrium price; higher equilibrium quantity
20 How an increase in demand affects the equilibrium 10How an increase in demand affects the equilibriumPrice ofIce-CreamConesSupplyHot weatherincreases the demandfor ice cream . . .D22. …resulting ina higher price . . .D1$2.50New equilibrium102.007Initial equilibrium3. …and a higher quantity sold.Quantity of Ice-Cream ConesAn event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones
21 Supply and Demand Together Shifts in curves versus movements along curvesShift in the supply curveChange in supplyMovement along a fixed supply curveChange in the quantity suppliedShift in the demand curveChange in demandMovement along a fixed demand curveChange in the quantity demanded
22 Supply and Demand Together Example: A change in market equilibrium due to a shift in supplyOne summer - a hurricane destroys part of the sugarcane cropPrice of sugar - increasesEffect on the market for ice cream?Change in price of sugar - supply curveSupply curve - shifts to the leftHigher equilibrium price; lower equilibrium quantity
23 How a decrease in supply affects the equilibrium 11How a decrease in supply affects the equilibriumPrice ofIce-CreamCones1. An increase in theprice of sugar reducesthe supply of ice cream . . .S22. …resulting ina higher price . . .DemandS1$2.50New equilibrium42.007Initial equilibrium3. …and a smaller quantity sold.Quantity of Ice-Cream ConesAn event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 cones
24 Supply and Demand Together Example: shifts in both supply and demandOne summer: hurricane and heat waveHeat wave – shift demand curve; hurricane – shift supply curveDemand curve shifts to the right; Supply curve shifts to the leftEquilibrium price raisesIf demand increases substantially while supply falls just a little: equilibrium quantity –risesIf supply falls substantially while demand rises just a little: equilibrium quantity falls
25 A shift in both supply and demand 12A shift in both supply and demandPrice ofIceCreamCones(a) Price Rises, Quantity RisesPrice ofIceCreamCones(b) Price Rises, Quantity FallsS2Smallincreasein demandNewequilibriumD2S2Largeincreasein demandS1S1NewequilibriumD2D1P2P2D1Q2Q2Largedecreasein supplySmalldecreasein supplyP1P1InitialequilibriumQ1Q1InitialequilibriumQuantity of Ice-Cream ConesQuantity of Ice-Cream ConesHere we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2.
26 What happens to price and quantity when supply or demand shifts? 4What happens to price and quantity when supply or demand shifts?No changeIn SupplyAn increaseA decreaseIn supplyIn demandP sameQ sameP upQ upP downQ downP ambiguousP DownQ ambiguous